Thursday, 31 July 2014

This is how they do it in the US.

Following on from the debate surrounding encouraging local people to allow fracking, the US is held up as a paragon of free market virtue.

Here's what Lynn had to say in The Telegraph.

"To create the kind of vibrant, fast-growing industry that has slashed the cost of energy in the US, and will soon make it self-sufficient again.

It is not just the industry itself that is valuable. In the US, shale has dramatically reduced energy costs, and that has led to a revival of the manufacturing industry.

One reason the industry has developed so fast in the US is that under American law the oil and gas is owned by the people under whose land it is discovered. If a developer finds it under your property, you make a fortune.

If the shale industry gets going, it won’t be the exploration licences that bring in the big money, it will be the tax on the energy produced, on the people working the rigs, and on the far larger number of jobs created by having significantly lower energy costs than our main industrial competitors. That is far more valuable in the medium-term than the revenues generated from exploration licences.

What Lynn conveniently neglects to mention, is the US has, with a few exceptions, an export ban on unrefined oil and gas. See here.

This causes a drop in the price, and by doing so, acts as a defacto land tax/citizen's dividend via lower profits/lower prices.

You can see why this approach is attractive in the US. Firstly, it side steps the whole thorny issue of property rights, and there is no visible  taxation. Good Commie free stuff. It also means there is a shortage of refined product abroad, which they can export, presumably at a mark up. Which can be taxed.

Sneaky, but hardly free market.

There is movement to loosen up these rules. In which case prices in the US will rise, landowners won't just be making an unearned fortune, but a bloody great unearned fortune.

Lynn then contradicts himself in the space of the same sentence. If the big money is the upstream taxes, prices would have to rise. Yet he then says prices will fall. Doh!

The truth is, unless we ban exports and produce a significant % of our LPG needs, we will be paying Global prices. Which are still set to rise.  Do we want to do it like they do in the US?

I'd say we are best of with a free market approach. And the monopolization of natural resources through exclusive property rights are incompatible (even if they can be somewhat mitigated by tax) with that ideal.


Kj said...

Good point.

Bayard said...

"The truth is, unless we ban exports and produce a significant % of our LPG needs, we will be paying Global prices."

No we won't. The Big Six energy companies will be paying global prices. We, the consumers, will be paying what the market will bear.

There are, as I said before, only three places where the money from shale gas and oil can go: into the public purse, where it will be a drop in the ocean compared to the national debt, into the oil companies' coffers where it will end up in the pockets of their senior management or their shareholders or into the pockets of the landowners underneath whose land the gas and oil lies. We aren't going see any of it.

Mark Wadsworth said...

We've done this one before with North Sea oil.

There is no need for "taxation" if you understand "ownership".

The oil belongs to whichever countries have the biggest navies and are prepared to fight for it, i.e. the UK and Norway, so they divvy up the ownership 50/50 along an arbitrary line.

Somebody has to do the extracting. So they bid for extraction rights, whoever does it for the lowest cost-oper-barrel wins the right and they get paid $x per barrel by the government.

The government pockets the difference between open market selling price and agreed extraction costs, the extractor gets paid a fair rate for actual work done, free of any other taxes.

With tracking, the "owner" of the land is entitled to some compensation for disturbance (in the absence of LVT), so the government says "There is some gas under your land, if you agree that we can grant permission to tracking company XYZ plc to get it out, we will pay you a windfall payment of £x, take it or leave it. No deal, no tracking, no cheque."

Either the landowner accepts the windfall cheque of many thousands of pounds or he doesn't.

Exploration costs can be run on the same lines, government employs a few scientists to do some guesswork and then go to selected landowners and say "If you allow exploration company to do a bit of test drilling, we will pay you a few thousand pounds, take it or leave it etc."

If landowner A gets too greedy they just go to neighbouring landowner B next door and try again until whoever is prepared to accept the lowest price gets the money and the greedy ones lose out.

That way, everybody has everybody else over a barrel and sensible deals get struck.

Kj said...

Wrong post reply Mark. Yes, I agree, these are sensible solutions. But I want to separate the issue of land value falls/increases caused by external activity, which is solved by LVT. Rents go down or up depending on the actual market effect will be. Fine. But if there is disturbance of your surface rights and the improvements thereon, that's where compensation comes in, because you most certainly can own them. And that compensation over and above the objective value, which is fair IMO, is necessarily a portion of the rents from the gas, gold etc. And it will be higher if the value is higher. As long as most of the rents is taxed, I'm fine with that. Even the oil rents from the North Sea, taxed at 78% here, leaves a decent profit, certainly more than the risk adjusted rate from any other activity. And this is deliberate, it should be an interesting prospect doing things that will earn the state shitloads of money, and it should be interesting to up and leave for fracking as well. It's not totally unheard of that someone should be slightly annoyed by being told to eff of for the sake of society, here's the rebuild cost of your house.